GST, the margin scheme and development cashflow

Why GST matters to a property lender

For many developers, GST is the largest single tax flowing through a project. It affects the price buyers pay, the cash you receive at settlement, the credits you claim during construction and the total you need to borrow. Lenders look at GST closely because errors can leave a project short of cash just when the loan needs repaying.

The Australian Taxation Office publishes guidance on property and GST at ato.gov.au. Our lesson on the GST margin scheme explains the basic mechanics; this article focuses on cashflow and finance.

When GST applies to property

Broadly, GST applies to taxable supplies made by businesses registered or required to be registered for GST. In property, that typically includes:

• sales of new residential premises;
• sales of commercial property by a registered business;
• sales of subdivided lots by a developer carrying on an enterprise.

Sales of existing residential premises are generally input taxed, which means no GST is charged but GST credits on related costs cannot be claimed. Whether a sale is taxable, input taxed or GST-free can turn on the facts, including whether a dwelling has been substantially renovated or leased for a period.

The margin scheme

Under the margin scheme, an eligible seller pays GST on the margin for the sale rather than on the whole price. The margin is usually the difference between the sale price and the price paid to acquire the property, or a valuation at a particular date in some cases. The seller and buyer must agree in writing to apply the scheme, typically in the contract, before settlement.

The scheme is not available in every case. For example, eligibility can depend on how the seller acquired the land. A buyer who acquires under the margin scheme cannot claim a GST credit for the purchase. Getting the scheme wrong can mean paying much more GST than planned, so most developers ask their tax adviser to confirm eligibility before they buy the site.

GST credits during construction

A registered developer can usually claim GST credits on construction costs, professional fees and other inputs related to taxable sales. These credits arrive with each business activity statement, after the developer has paid the GST-inclusive invoice. In the meantime, the developer has to fund the GST component.

Construction lenders usually fund the GST-inclusive cost, then expect credits to flow back, either to reduce the loan or to fund later costs. Some lenders provide a separate GST facility for this purpose. Our page on cost overrun and GST funding facilities explains how these work.

Purchaser withholding at settlement

For many sales of new residential premises and potential residential land, the purchaser must withhold an amount from the price and pay it to the ATO at settlement. The developer must notify the purchaser in writing whether withholding applies. The withheld amount is credited to the developer's GST account.

This rule changes cashflow. If a lender expects to be repaid from settlement proceeds, the withheld amount does not reach the developer or the lender at settlement. The developer receives a credit later, when its activity statement is processed. Lenders therefore model settlement proceeds net of withholding and may require the developer to fund the gap or wait for credits before releasing security.

Effects on feasibility and the loan

Lenders build GST into their feasibility in several places:

1. Revenue. Gross sale prices are reduced by GST payable, using the margin scheme if eligible.
2. Costs. Construction and professional costs include GST, with timing of credits modelled.
3. Interest. Funding the GST component before credits arrive adds interest.
4. Repayment. Settlement proceeds are reduced by purchaser withholding.

A difference in GST treatment can change the maximum loan, the pre-sale requirement and the profit margin a lender accepts. If your bank declines the loan because of these numbers, our guide to APRA rules and bank lending limits explains how bank policy is set.

Common mistakes

• Assuming the margin scheme is available without checking how the land was acquired.
• Forgetting to include the margin scheme clause in the contract before settlement.
• Not notifying purchasers about withholding.
• Modelling settlement proceeds without deducting withholding.
• Treating GST credits as available immediately rather than after lodging an activity statement.
• Mixing residential and commercial components without separate GST analysis.

GST and other taxes together

GST rarely sits alone. Developers also face transfer duty on acquisition, land tax during the holding period and income tax on profits. Foreign developers may also pay surcharges. Our guide to FIRB rules for foreign borrowers and our article on land tax charges and mortgage priority cover those interactions. For duty in each state, use the stamp duty hub.

Talking to your lender about GST

When you approach a lender, bring a clear GST position from your adviser: whether sales are taxable, whether the margin scheme applies, how withholding affects settlements and how credits will be used. A lender that sees a well-prepared GST analysis can price and structure the loan with more confidence, and is less likely to impose extra conditions or reduce leverage.

A worked example

A developer, Alex, buys a site from a private owner who was not registered for GST, and plans to build and sell several apartments. Alex's tax adviser confirms that the purchase was not a taxable supply, so the margin scheme may be available on the later sales, and that the margin can be worked out using a valuation in some circumstances. Alex's contracts of sale include a written agreement to apply the margin scheme and notify buyers that GST withholding applies. In the feasibility, Alex shows revenue net of GST under the margin scheme, construction costs including GST, the timing of GST credits by activity statement and settlement proceeds net of withholding. The lender reviews the model, agrees with the treatment and structures a facility with a separate GST line to fund the gap until credits arrive.

Questions to ask your adviser

• Is each sale taxable, input taxed or GST-free?
• Can the margin scheme be used, and on what basis will the margin be worked out?
• What must the contract say for the scheme and for withholding?
• When will GST credits be claimed, and how will they be applied to the loan?
• How do residential and commercial parts of a mixed project differ?

Keeping good records

The ATO can review GST positions for some time after a project ends. Keep valuations, contracts, notices to purchasers, activity statements and correspondence with your adviser together. Lenders may also ask for these records when refinancing residual stock, because they need to understand any GST still payable on unsold units.

Small projects are not exempt

GST obligations can apply even to modest projects, such as a single knockdown and rebuild for sale or a small subdivision. Whether you are carrying on an enterprise, and must register, depends on the facts. Many first-time developers are surprised by GST at settlement, so ask your adviser before you buy the site rather than after the build.

Further reading

• Construction finance
• Cost overrun and GST facilities
• Term sheet fees and default clauses
• Exit strategy: refinance or sale